CEO vs. Worker Pay: SEC Weighs in on Income Inequality?

On Aug. 5, 2015, the U.S. Securities and Exchange Commission approved a final rule requiring companies to reveal the pay gap between the company’s chief executive officer and its median worker. The new rule, which passed after a 3-2 vote of the Commission, will take effect in 2017. However, pay ratio data will likely only become publicly available in 2018, because companies will start disclosing the new pay ratios for the fiscal year beginning on or after Jan. 1, 2017.

The pay ratio rule generated heated debate before the Commission. The SEC received over 280,000 comments on the issue, since it was first proposed two years ago as a result of the 2010 Dodd-Frank Act, which requires the disclosure. Despite the statutory direction, the SEC delayed the progress of the rule for several years, leading to attacks from labor unions and Democratic lawmakers. Other groups—including Republican lawmakers and the U.S. Chamber of Commerce—strongly opposed the rule.

The final rule responds to concerns about the costs of compliance by providing companies with flexibility in determining median worker pay. For example, median employee pay must be identified only once every three years; companies can consider cost-of-living adjustments reflecting that lower wages in some areas result from a lower cost of living (resulting in higher median pay), and companies can calculate the median pay on any date within the last three months of the fiscal year, thus potentially excluding many seasonal workers from the calculation. Companies will be allowed to select their own methodology for identifying a median employee and that employee’s compensation, including through statistical sampling of its employee population or other reasonable methods. In addition, companies may exclude up to 5% of their foreign employees from the calculation if those employees work in countries where data privacy laws and regulations make compliance difficult.

The new rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, multijurisdictional (“MJDS”) filers, or registered investment companies. The rule also provides transition periods for new companies, companies engaging in acquisitions or other business combinations, and companies that cease to be smaller reporting companies or emerging growth companies.

Detailed information from the SEC about the new pay ratio rule, including the full text of the final rule, can be found here.